The independent investigation into three major issues concerning LANCANG TEA (06911.HK) has been completed, with the findings published in a report. The investigation was launched following the company's listing on the Stock Exchange in December 2023, prompted by significant events involving its wholly-owned subsidiary Guangzhou Kangrui and key management personnel. These events, which attracted scrutiny from the exchange and market participants, included private lending disputes, litigation and frozen bank accounts, and a significant inventory shortfall.

Scope and Methodology of the Inquiry

The investigation aimed to thoroughly examine the facts, causes, and impacts of these three core matters, and to check for any other undisclosed irregularities by the involved individuals and the subsidiary since the IPO. The scope covered the detailed facts of the private lending case, the associated bank account freezes and lawsuits, and the inventory discrepancy. It also sought to determine if unauthorized seal usage led to additional liabilities, if frozen funds were misappropriated, the specific causes of the inventory loss, and the existence of any undisclosed related-party transactions or financial fraud.

The investigative methods included a comprehensive review of documents such as arbitration awards, court filings, contracts, and internal records; interviews with relevant personnel; cross-verification of evidence; and compliance checks against listing rules and internal policies. The investigation faced certain limitations, including the unavailability for interview of a retired warehouse manager and the unrelated parties in the lending and litigation disputes.

Detailed Findings on Core Issues

Regarding the private lending matter, the report found that in December 2024, then-Director Zhang Muheng borrowed the company seal from Guangzhou Kangrui's administration department. Then-General Manager Wang Juan instructed him to use it to sign a loan contract for RMB 10 million in the subsidiary's name, with the funds being directed to her personal accounts for her own use. She provided a personal guarantee for the loan. The subsidiary was unaware of the contract, and the funds were never received into its official accounts. After a default, the lender initiated arbitration.

Concerning the frozen accounts and litigation, the investigation found that in June 2024, Mr. Zhang improperly used the seal to issue a power of attorney authorizing another company, Guangzhou Minghui, to handle certain product business. Relying on this authorization, Guangzhou Minghui entered into a product supply contract with a company from Hebei province. Separately, Ms. Wang, Mr. Zhang, and a company they co-owned provided a personal guarantee for this deal. When disputes arose, the Hebei company sued, naming LANCANG TEA and Guangzhou Kangrui and applying for asset preservation, leading to the freezing of several bank accounts. The company stated it had no prior business with the Hebei company and did not receive the involved funds.

For the inventory shortfall, it was discovered that in early January 2025, 35 tonnes of the company's new tea products were removed from a Guangzhou Kangrui warehouse by individuals from another group during an unauthorized entry, linked to a previously signed product exchange memorandum by Mr. Zhang. Ms. Wang was present but claimed unawareness of the removal of company stock. The loss, valued at approximately RMB 35.2 million on the subsidiary's books, was later resolved through a product exchange agreement, swapping the lost new tea for older tea inventory.

Responsibility and Remedial Actions

The investigation attributed direct responsibility for the three incidents to Ms. Wang, citing her instruction to bypass procedures and her personal use of company-related transactions. Mr. Zhang was deemed to bear primary responsibility for improperly using the company seal, failing to report risks, and participating in irregular operations. As a result, Ms. Wang has resigned from all positions at the company and has been asked to provide compensation. Mr. Zhang has been formally reprimanded and has resigned from his board and executive roles, though he remains to handle legacy issues.

The company has implemented extensive corrective measures focusing on inventory management, warehouse security, contract controls, dealer management, and overall internal control enhancements. These measures were largely completed by April 2026.

Conclusions and Follow-up

The investigation concluded that the three issues were primarily the result of personal actions by the former senior managers who circumvented internal controls. Aside from these specific incidents, no other instances of management override of controls, fund misappropriation, undisclosed related-party transactions, or fraudulent inventory reporting were found. However, the report noted a lag in disclosing the progress of remedial actions.

The board of directors believes the company's overall risk management and internal control systems are sound and effective, with no material weaknesses. The company will continue to track debt recovery and litigation, conduct ongoing compliance risk reviews, and enhance information disclosure and investor communication as recommended by the report.